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GRATs

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GRATS are a special kind of grantor trust. GRAT is the acronym for Grantor Retained Annuity Trust. Under such a trust, the grantor establishes an irrevocable trust for his or her beneficiaries, and retains the right to an annuity for a term of years. The value of the annuity is subtraced from the value of the gif of the remainder. Values are determined under rates that are published monthly and are designed to be reflective of the true economic value of the annuity at the time the trust is established. Say, you put $10 million in a trust and retain the right to an annuity of $200,000 per year for 10 years. The value of the remainder is zero, and probably will be zero. But what if you invested the trust in Wal-Mart stock at a time when it was trading for $10 a share, and during the third year of the trust the value went to $1000 a share and stayed there. Then the remainderpersons would get a large gift with no transfer tax associated with the transfer at all.

 

Can you see why GRATs are popular? Can you see why future legislation restricting the use of GRATs might be inacted? Acting quickly to take advantage of this technique while you can could be a good idea.

2008 – Grantor Trusts Including GRATS

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Long, long ago (when I began practicing law), trusts were taxed at rates more favorable than that of individuals. It was all the rage to set up trusts to save on income taxes. Following a common pattern, legislation was enacted that ignored certain trusts (called "grantor trusts") for income tax purposes. The IRS used its regulatory authority to keep trusts from being taxed separately by liberally interpreting the statute. Then things changed. Now trusts are taxed at higher rates than individuals, at least at lower income levels. So, creative tax practitioners began to deliberately make trusts subject to the grantor trust rules. Further, it was discovered that a gift to an irrevocable trust could be made complete for gift tax purposes, and yet still be subject to the grantor trust rules, which meant that the grantor paid the trusts income taxes. Is the payment of the trusts income taxes a taxable gift to the trust? Apparently not. Thus was born the IDIGIT, the intentionally defective grantor trust.

2005 – What You Should Know About Your GRAT

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